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Time 'not right' for yuan float
(CNN) -- As the chorus of criticism grows about the perceived low value of the Chinese currency, leading economists back Beijing's assertion that the time is not yet right to float the yuan. China's yuan is pegged in a band of 8.2760 to 8.2800 to the U.S. dollar, set by the central bank, the People's Bank of China. While floating its currency is a long-term goal of the Chinese government, experts say that is still years away. Responding to comments Wednesday by U.S. Federal Reserve Chairman Alan Greenspan that China eventually will need to float, a Chinese foreign ministry spokesman said the current exchange rate helped China's development and that of Asia as well. Hong Kong-based economists for HSBC, JP Morgan and Morgan Stanley all say that factors such as deflation, weakness in China's financial system and the need for domestic stability more than offset the external pressure for revaluation. A group of bipartisan U.S. senators are the latest to voice concerns about the yuan, urging the U.S. Treasury Thursday to investigate whether China is keeping its currency undervalued to reap a trade advantage. China has indicated in the past that it "intends to move towards greater flexibility and this is something we support," Treasury spokesman Rob Nichols told Reuters news agency. He said U.S. Treasurer John Snow would respond later to the senators' call for an investigation. Joan Zheng, chief China economist for JP Morgan in Hong Kong, told CNN Friday that the timing for yuan flexibility was not yet right. She said there was a "misperception" about China's export performance, saying it was the shift of manufacturing capacity from the rest of the world to China that was driving its export boom, rather than the exchange rate. Despite World Trade Organization figures showing China is now the world's No. 5 trading nation behind the United States, Germany, Japan and France, Zheng said China's share of global trade (4.73 percent) was still much lower than Japan's. She said the top priority for China's leaders was social stability. With domestic consumption still weak and an overheated investment environment, it was not yet time to float the yuan. World's factory
Zheng's view is shared by Morgan Stanley's chief China economist Andy Xie, who said in a recent commentary that the peg against the dollar was "probably the most appropriate currency policy for China." Xie said China was becoming the world's factory, but prices for tradable goods were still determined in the United States, the world's largest and most open market. He said the yuan peg removed currency risk for suppliers based in China.
Xie's U.S.-based colleague, Morgan Stanley global economist Stephen Roach, warned last week that China was being made a scapegoat for the problems of others. Roach told a Sydney press conference he did not believe China should revalue the yuan, noting that 60 percent of the export growth in recent years was from Western companies that had set up in China to take advantage of its low labor costs, technology and infrastructure. Roach said China had already made it clear it planned to open its capital account and make the yuan freely convertible. "There is a need to reform, but China won't do it overnight," he said. Roach said the process could take three years, five years, or even longer. HSBC's Hong Kong-based China economic insight team said in a recent commentary that Beijing's leaders were unlikely to consider revaluing or floating the yuan, given the "myriad of problems" facing the country. It said these problems included a growth slowdown, rising unemployment, weakness in the domesticial financial situation, fiscal vulnerability and deflation. It said trade liberalization stemming from WTO membership had already cost millions of jobs in China. To maintain stability, China needed to keep its exports and foreign direct investment (FDI) rising, it said. Official figures released this week show China's economy grew at 8.2 percent in the first half of the year, even with the impact of SARS pushing second quarter growth down to 6.7 percent, its lowest pace in 11 years. (Full story) The National Statistics Bureau is now predicting full-year growth will top 8.0 percent, noting that SARS-hit industries were recovering faster than expected.
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